Bankrupt American Apparel Inc. has moved one step closer to exiting Chapter 11 bankruptcy court proceedings after obtaining unanimous approval of all voting classes for its amended reorganization plan, even as Dov Charney continues his push to buy back the company he founded.
At the same time the retailer said it has reached an agreement with the constituency groups, Hagan Capital Group and Silver Creek Partners have jointly offered to acquire the chain for $300 million. The investment group said they have the support of Charney. And while they are the only ones to submit an offer, there’s still the potential for a bidding war as one firm has signed a non-disclosure agreement with the retailer and another group said it has had discussions with American Apparel’s financial advisor, sources said. Cardinal Advisors LLC, financial advisor to Charney, declined comment.
The key word is potential when it comes to the possibility of a bidding war. That’s because American Apparel late last year sought Delaware bankruptcy court approval to extend its period of exclusivity for the exclusive right to file a reorganization plan, a move that would give it the ability to muscle out competing bids and plans. The motion is still subject to court approval. Charney filed an objection to the exclusivity motion shortly before deadline time Monday afternoon. Meanwhile, a hearing on approval for the amended plan of reorganization is scheduled for 10 a.m. on Jan. 20.
In order for the Hagan-Silver Creek Partners bid to have any legs — or for any other offer that could be forthcoming — support from debt holders and American Apparel would be required. In the alternative, a buyer would need to convince the bankruptcy judge overseeing the American Apparel bankruptcy that its offer is superior to the reorganization plan that’s up for approval on Jan. 20.
The retailer said, “American Apparel evaluates all bids consistently.”
The company and its five affiliated debtors, the official committee of unsecured creditors and the committee of lead lenders, which hold more than 90 percent of the retailer’s senior secured notes, have agreed on the key terms of an amended reorganization plan, which will be filed in a few days. The amended plan has a condition requiring the retailer to obtain an additional $40 million in new financing as exit capital, which would supplement the $40 million of new capital by the committee of lead lenders.
Andrew J. Herenstein, cofounder of Monarch Alternative Capital LP — the lead debt holder — and a member of the committee of lead lenders, said of the current agreement with the retailer, “This vote marks a significant milestone in the revitalization of American Apparel.”
Under the terms of the amended plan, unsecured creditors will receive their pro-rated share of $2.5 million, which represents a 150 percent increase from the payment that initially provided for in the prior Chapter 11 plan of reorganization. All unsecured creditors, regardless of class, can partake in the pro-rated allotment.
Holders of the senior unsecured notes have agreed to waive their rights to receive this cash distribution for their unsecured claims, which increases the recoveries to general unsecured creditors by 30 times. Further, the funding of the litigation trust will be increased to $500,000. The litigation trust was established for the benefit of unsecured creditors to allow the trust to investigation and pursue potential claims to increase recoveries to unsecured creditors.
Paula Schneider, chief executive officer of American Apparel, said, “This is an important step forward in emerging from our restructuring process as a stronger, more vibrant company….We remain focused on executing our turnaround plan, and positioning American Apparel for the future by creating new and relevant products, launching new design and merchandising initiatives, growing our e-commerce business, and creating exciting and creative marketing campaigns to share the story of our progress.
Meanwhile, Hagan and Silver Creek, which upped their buyout bid to $300 million from an initial proposal of $200 million last month, insist theirs is better than the amended plan that’s on the table. That’s because their bid presumes an injection of $130 million to the retailer, giving it $160 million of liquidity and new equity. It also said unsecured creditors will “receive a recovery of 10 times that under the debtor’s plan.” In contrast, the amended plan swaps out debt for equity, and wipes out existing shareholders. The Hagan-Silver Creek investment would be managed by PressPlay Group, a private equity arm of San Francisco and Shanghai-based PressPlay Global.
Chad Hagan, managing partner of Hagan Capital, took issue with the current management team and efforts to turn around the retailer. Charney has had discussions with industry executives about joining the company if its bid gets accepted and he returns to the business. Sources said Charney would have responsibility over product development, the factory, Web site and stores, and that his title is yet to be determined.
Although Charney declined comment for this story, he did note: “We’re not there yet. We’ve got to fight these guys. This is about a transfer of wealth from me. I had 43 percent of the company two years ago and I have zero today. How did that happen? It was not about what they said it was. It was a corporate raid.”